Disrupt Yourself and Grow

I often learn the most by speaking with or studying successful investors that have the complete opposite strategy from my own. There is no better way to find holes in your strategy, or extract the nails that have been pounded down deep into your investment subconscious mind than talking to a successful investor that does things differently. Disrupt yourself and grow.

As many of you know, I run a concentrated portfolio of misunderstood businesses. I use the term misunderstood because I’ve found too many equate value with cheap. I’m not necessarily looking for cheap. In general, I’m looking for businesses, management teams, and opportunities that are misunderstood by the market place. Perhaps it’s the business quality that is misunderstood. Perhaps it’s the quality level of management that is misunderstood. Perhaps it’s the culture, strategy, or intellectual property. It could even be misperceived negative events that have occurred, and shareholders are selling, and I believe they are wrong. Over the last few years, I’ve invested in about one new investment per year.

My investment philosophy has changed quite a bit from 10-15 years ago when I would have described it as more trading – momentum driven. I’m also not condemning a short-term approach to microcaps because a shorter-term approach likely fits better within the lifecycle of most microcap companies. What I mean by this is most microcap success stories are fad stocks that do well for 1-8 quarters. They go up 100-500% very quickly as they catch a wave or trend, but they soon fall back down to mediocrity when the wave hits the beach. Momentum takes them to levels where their business fundamentals can’t keep them.

Due to these shorter-term lifecycles of microcap businesses, short-term thinking is prevalent among microcap investors. This provides a distinct advantage to those that can focus on the minority of potentially sustainable businesses and look at them through a longer-term lens. My maturation as an investor has occurred through a variety of experiences and also encounters with great investors of all types.

In a recent Google Talk, François Rochon of Giverny Capital, talks about “The Art of Investing”. Here is the [FULL TRANSCRIPT]. I really liked this slide:

“If you want to be an artist in the investing world, well, you want to master that art. You want to first choose an art that you really love. You want to study the masters of that art. Also, it’s important that, as master paints, investor invests, so you want to be active in your art. You want also to develop your own style, have an independent mind, and always strive for improvements.”

– François Rochon

Pablo Picasso, Vincent van Gogh, Leonardo da Vinci, Claude Monet, Salvador Dali, Rembrandt, Andy Warhol, etc were all so uniquely talented and different. The greats of investing are the same way. Don’t limit yourself to only studying the greats of value investing.

“I think I learn more reading about how great investors who weren’t value investors invested than I do about reading the 200th book about value investing.”

Most academic institutions teach the same types of investing courses, so they produce average investors. When is the last time you’ve seen an institution teach a class on venture capital or any other non-value investing course? To grow and mature as an investor, you need to let yourself be open to new ideas and new ways of doing things. Said differently, you need to be open to disruption of your beliefs and mental models.

“There are two key lessons I’ve learned in my first 10 years. So, the map is not the territory is, I think, a very famous dictum. What it means to me is that, the frameworks that we use to make decisions are always just the frameworks in our head, and they’re not reality itself. Reality is infinitely more complex and dynamic than whatever tools, mental models we use to do our analysis and make our judgements. So, we can’t be trapped in our mental models, although it’s very, very easy to be trapped in our mental models. We have to be committed to changing our mental models, which means somehow stepping outside of them, or discarding them altogether.”

This past summer I attended a conference where Tobias Carlisle (@Greenbackd) was a speaker. I was so impressed, I asked him to speak at our MicroCap Leadership Summit 2018. Toby’s investment philosophy is very different from my own. He is a diversified deep value quant. I’m a concentrated, quality focused, management focused investor. He is a very successful investor, and I loved his presentation. Afterword we all went out for dinner. He then introduced me to another friend of his who manages a fund in Canada. This fund manager is literally the opposite of me. He is high turnover, deep value focused, and owns 400 companies in his actively managed fund. He owns megacaps and nanocaps. He will own tiny positions ie $500 individual positions in a $30 million fund. I’ve been privy to his performance, so I know his strategy has been quite successful since he launched it a few years ago. I spent 2 hours talking to him. I couldn’t’ stop peppering him with questions. He made me think differently about some of my strongest held investing beliefs, and I thanked him for it.

The experience didn’t change my overall investment philosophy, but by studying him I was inverting myself, and it allowed me to see things that my own mental model was blocking. By disrupting myself, I was able to think differently about things and fill in some gaps.

Similar to how water flows into a depression, as you mature as an investor, you slowly find your way to an investment philosophy that fits your personality. Don’t just study the masters that are similar to you. Learn from all of them, so you can form your own unique style. Be open to disruption. Some of the most productive decisions you will ever make in life are the ones where you change your mind on a longstanding belief. Disrupt yourself and grow.

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